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Taxes, Financing Decisions, and Firm Value

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

May 1997

Center for Research in Security Prices (CRSP) Working Paper No.

Abstract:

We use cross-section regressions to study how a firm's value is related to dividends and debt. With a good control for profitability, the regressions can measure how the taxation of dividends and debt affects firm value. Simple tax hypotheses say that value is negatively related to dividends and positively related to debt. We find the opposite. We infer that dividends and debt convey information about profitability (expected net cash flows) missed by a wide range of control variables. This information about profitability obscures any tax effects of financing decisions.